Monthly Archives: February 2013

Do you wonder why the stock market is doing so well when the economy is not?

Here’s an explanation from Dallas Fed President Fisher:

But a not-so-funny thing has happened on the way to the reality forum. While bankers and other sources of credit have slowly but consistently liberalized their lending practices, borrowers have not been especially keen to put cheap and super-abundant credit to use in expanding payrolls to the degree the FOMC desires.  

To be sure, we have, as hoped, seen a reinvigorated housing market. Indeed, FOMC records will show that based in the superb work done by two housing-market experts at the Dallas Fed—John Duca and Anthony Murphy, working with John Muellbauer at Oxford—and thanks to our field soundings with housing and housing-related business leaders, the Dallas Fed was way ahead of others at the FOMC table both in warning of the housing market debacle and then recognizing the housing recovery.[6] The fact that the housing-market gears have now begun to mesh is why I believe we are running the risk of overkill by continuing our mortgage-backed securities purchase program at the current pace and would suggest tapering off those purchases.

As to the more broadly impactful Treasury purchases, occurring as they have simultaneously with a loss of confidence in the euro bond markets—I like to say that, relatively speaking, the U.S. economy has been the “best-looking horse in the glue factory”—they have indeed led to a massive bond and stock market rally. For the ninth time in U.S. history, we have experienced a doubling of the market indexes; corporate borrowing rates are at the lowest levels on record, including those for CCC-rated credits that are just north of default.

That’s the good news. Some sharp market operators have done very well. For private-equity firms, for example, hyper-accommodative monetary policy has offered a chance to go back to the glories of payment-in-kind and other financial techniques that enrich financiers but may not create employment. For the largest banks and financial institutions, policy has helped dig them out of the holes in which they found themselves (including the hole of executive compensation). And for the wealthiest investors, even unto the revered Oracle of Omaha, there has been the windfall of super-abundant credit that,  after adjusting for tax deductions on interest and a modicum of inflation, is practically free. Ordinary savers and retirees have benefited from the turnaround in the all-important housing sector, but with the remainder of their savings, they have been waylaid on the sidelines of the zero bound. In addition, the 5,500 or so smaller banks that are the backbone of our communities have seen their interest margins squeezed severely. The wealth effect, in other words, has been unbalanced. Main Street does not seem to have been impacted to the same degree as Wall Street. 

To be sure, as mentioned, businesses have been able  to improve their balance sheets and are enjoying higher stock market valuations of their businesses. However,  thus far, businesses have pursued payroll-expanding job creation with less enthusiasm than had been hoped for. Unemployment remains annoyingly high. There are some pockets of exception like Texas, which now operates at employment levels 3.1 percent above its prerecession peak and, over the last decade, has created jobs across the entire income spectrum. Nationwide, meanwhile, job creation has been weak and in the important middle-income quartiles has been shrinking. 

Employers large and small, privately owned or publicly  traded, will tell you that despite access to cheap and abundant capital, they are hesitant to make long-term commitments, including hiring significant numbers of permanent workers. They cite uncertain growth prospects for the goods and services they sell at home, where consumption is retarded by slow growth in employment and, lately, by the increase in payroll taxes. And abroad, these employers point to the dampened consumption stemming from the economic debacle in Europe and its knock-on effects on China and the export-led emerging economies. They are uncertain about fiscal policy, not knowing what their taxes will be and what will happen to all-important federal spending that directly impacts them or their customers. They are uncertain as to the ultimate effect on their cost structures of the seemingly endless expansion of health care and other mandates and regulations, however meritorious their intention. And, for some, there is a deeply imbedded worry that the Fed’s contortion of the yield curve and cost of money cannot last forever, or, if it lasts too long, will eventually result in financial bubbles and/or uncontrollable inflation, adding another uncertainty to the plethora of uncertain factors that already plague them.

As I walked down memory lane in preparation for this lecture today, I thought of my days at business school in the mid-1970s. Everything we learned in business school was oriented toward operating and growing companies under the assumption of constrained, conservative debt markets and a fundamentals-driven equity market. Today, the opposite obtains: Credit is super-abundant and stock market behavior is conditioned not so much by the fundamental performance of its underlying companies but by increasing doses of monetary Ritalin.[7] Against this backdrop, I am not surprised by the reaction of businesses. Operating in a highly uncertain environment, it is eminently sensible for them to defensively use their newly strengthened balance sheets to buy back shares and pay out dividends or employ them offensively in ways—say, in making acquisitions—that often lead to employee rationalization, not payroll expansion for U.S. workers.

This is how businesses really think; this is the way people really are.

The bottom line is that rather than achieve the intended theoretical effect, I believe the policy of super-abundant money at costs deviating substantially from normal equilibrium levels may ultimately prove to be counterproductive. Or it may restrain the benefits that theory might suggest. 

It was interesting to see Mr. Fisher stress and emphasize that much of the help is going to the wrong people – Wall Street not Main Street.  Don’t get me wrong, I want Wall Street to do well, but I don’t want it to do well at the expense of Main Street, because that means that we are inflating another asset bubble, and that is not good for anyone.

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A Widow’s Journey

The August 2012 issue if Financial Planning features an article about an advisor who works with widows, and has some first-hand insights because she is one.  Her husband died when she was 30. 

“It was an experience of being a deer in the headlights and not being able to make the decisions I needed to make.  For me it was a matter of not being able to get out of bed, not to mention doing anything productive.” 

She had trouble getting credit, settling the estate, taking care of the kids, making a living. 

In addition to that, friends and even trusted advisors led her into risky and inappropriate investments. 

Her story is a familiar one to us.  It’s one of the reasons we wrote the book Before I Go.  We have developed a reputation for helping widows after they have found themselves “suddenly single” and we are now sought out when tragedy strikes. 

If you know someone who can use our help, or are in need of help yourself, call us ar 757-638-5490.

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Are You Too Scared to Invest?

 

Ellen Schultz has a good article in the Wall Street Journal about people who were scared out of the market and are now sitting in cash, frozen by fear.  She puts the dilemma this way

Most people—if they hope to maintain their standard of living in their old age—know their savings will need to earn more than the roughly 0.5% interest that most bank accounts pay these days or the 1.85% they would get from a five-year “jumbo” certificate of deposit.

Still, it is a risky time to invest. Stocks are flirting with record highs. Interest rates have nowhere to go but up, which will cause bond prices to drop.

Though getting better returns is essential, telling skittish investors to jump back into the market now feels like advising drivers to steer into a skid. But experts have some suggestions to help people get behind the wheel, while minimizing their risk of crashing and burning.

We know how you feel.  We never got out of the market so we don’t have this problem but we do get questions from people who were badly burned by the markets in 2000 and 2008.  There are some people who should simply not be in the market.  They are psychologically unable to cope with the ups and downs and are better off hiding their money under a mattress (or putting it in the bank which at today’s interest rates is just about the same thing). 

But for those who have investable funds, there are a few things that can be done.

  • Schultz refers to “multi-asset funds.”  This is a way of buying a diversified portfolio with one fund.  The problem with this is that while the goal is exactly right, the vehicle is often one of those mediocre hybrids that does nothing well.  At Korving & Co. we prefer to custom build your own diversified portfolio using the best fund in each of its classes.
  • She also suggests “equity income funds” which is a variation of her first suggestion.  See my comments from the first point.
  • Finally she suggests “dollar cost averaging.”  From the aspect of investor psychology, this strategy is actually a good one because people feel they are dipping their toe in the water rather than jumping in.  Statistics studies have shown that the total return over a long period of time is actually not as good, however, we think that it’s probably a good way to go for the really skittish investor. 

If you have been on the sidelines waiting for someone to ring the bell telling you when to get in, it’s not going to happen.  In you need a little help, call us.

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Brokers Pressured to Keep Promoting High-Margin Products

 

Want to contribute to Merrill’s bottom line? 

From the Wall Street Journal February 25, 2013.

NEW YORK–The largest retail brokerages in the nation may have ended last year on a high note with increased revenues, but brokers aren’t finding themselves relaxing just yet.

Instead, some say they are feeling the pressure to keep revenues up by promoting investment products with higher commissions and fees.

This is one of the big, big differences between the brokers who work for the major investment firms like Merrill Lynch, Morgan Stanley, UBS and a host of smaller firms.  Brokers at these firms are there first and foremost  to produce profits for the firms and its shareholders.  We have no problems with profits, but we see a very basic conflict of interest when profits come before the client’s best interest. 

The increased activity showed in the brokerage firms’ quarterly earnings. Morgan Stanley reported a big jump in its pretax profit margin, hitting 17%. Bank of America Corp.’s global wealth management group, which is composed mostly of Merrill Lynch, and UBS AG’s Americas wealth management unit both saw their average revenue per adviser climb significantly.

The improvements were likely partially a result of more trading activity, but also partially due to cost cutting.

The quest now is to keep those revenues up.

To do so, firms have an eye on promoting products that generate greater profit margins.

According to a broker at UBS Wealth Management Americas in New York, there has been a big push to put client money in alternative investments as well as lending business.

As a Registered Investment Advisor we have a fiduciary duty to put our clients’ interest ahead of our own.  The “wirehouse” broker (the largest retail brokerages are commonly referred to as the wirehouses) does not.  In fact, he is encouraged to increase the firm’s bottom line by moving his clients into products that are most profitable for the company, not necessarily the best for his client.   The way we at Korving & Company make money is by charging a fee for our services.  Our fee is spelled out very plainly in our advisory agreement, and is the only thing that impacts our bottom line.  We do not get added income from the  investments we buy for our clients, a very common practice at the wirehouses.

Want to know more about the advantages of RIAs?  Contact us.

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“Ultra” Wealthy Trust Advisors More

Who do the wealthy trust more when making financial decision? 

According to an SEI survey of multi-millionaires, respondents continue to use financial advisors. Responding to the question, ‘When it comes to difficult financial decisions, from whom do you feel most confident getting advice?’, 39% selected “wealth advisor,” far ahead of “attorney/accountant,” in second place with 22%. Drilling down, wealth advisors were the top choice of 53% of retirees, 48% of those 50-59 years old, and 46% of those 60 or older.

On the downside, multi-millionaires are still unsure that they have enough to maintain their lifestyle.

Ultra-wealthy investors remain insecure about their wealth. The average multi-millionaire believe they would only feel financially secure with double the assets they currently have, according to an SEI survey.

What makes you feel financially secure?  We would like to know.

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What’s the hurry? Financial decisions that can wait

 

From Reuters we get some ideas that can be better if you procrastinate.  Here are some things that get better if you wait.

— Transferring from a traditional individual retirement account to a Roth IRA. When you move money from a tax-deferred IRA to a Roth, you have to pay income taxes on the amount you move. If you do that at mid-career, you’re likely to be paying at a top tax rate, and perhaps even limiting the amount of new money you can invest while you pay taxes.

COMMENT: If you wait until after retiring, you may be in a lower tax bracket.  But there are no guarantees since tax rates are on the rise.

— Buying TIPS. Treasury inflation protected securities … If you wanted to sell TIPS before maturity, you’d get less back than you paid for them.

COMMENT: That’s mostly true because TIPS prices have been bid up to extraordinary levels.

— Buying a fixed annuity.

COMMENT: Rates today are at a record low.  And, by the way, the older you are the higher the income from a fixed annuity.

— Paying off that mortgage

COMMENT: At today’s low, low interest rates you may be able to invest and make a higher rate of return on your money than the interest on your mortgage.  On the other hand, not having a mortgage payment frees up a lot of cash, and many people prefer to know that they, rather than the bank, own their home. 

— Buying the new car.

COMMENT: A car is a depreciating asset.  The writer suggests taking a trip instead, spending money on experiences, instead of things.  Good advice.  At one time, 100,000 miles was the limit for any car.  Today, many cars are good for another 50, 100 or 150,000 more miles.  The time to replace a car is when maintenance costs begin to mount.

 

Wondering what to do and when to do it?  Contact us.

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Rich in America, Part 4: Are the Wealthy Happier?

Not necessarily, as evidenced by the rich celebrities who kill themselves.  I vividly remember learning the poem Richard Cory by Edwin Arlington Robinson.  For those who never read it, here it is in full:

Whenever Richard Cory went down town,
We people on the pavement looked at him:
He was a gentleman from sole to crown,
Clean favored, and imperially slim.

And he was always quietly arrayed,
And he was always human when he talked;
But still he fluttered pulses when he said,
‘Good-morning,’ and he glittered when he walked.

And he was rich – yes, richer than a king –
And admirably schooled in every grace:
In fine, we thought that he was everything
To make us wish that we were in his place.

So on we worked, and waited for the light,
And went without the meat, and cursed the bread;
And Richard Cory, one calm summer night,
Went home and put a bullet through his head.

What does the survey say?

… wealthy investors we surveyed hew to the age-old maxim. Forty-four percent disagreed that money can buy happiness. That’s more than twice as money said that it can (21 percent).These sentiments are consistent across wealth levels, gender, occupation, marital status, and financial knowledge.

And here are a few thought for those with money and who wish to be happy.

  • Buy more experiences and fewer material goods
  • Use money to benefit others
  • Buy many small pleasures rather than fewer large ones
  • Delay consumption
  • Pay close attention to the happiness of others.

 

 

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Rich in America Part 3: How Do the Wealthy Live?

Tom Stanley wrote a book years ago “The Millionaire Next Door” that gives us a much better look at how “the rich” really live.

How do the wealthy live? Not as lavishly as most people imagine, according to the latest insights from Spectrem’s Millionaire Corner, which suggest that the trappings of wealth appear more impressive from a distance.

Less affluent investors are most likely to perceive the rich as living large, while high net worth investors ascribe a more middle class lifestyle to the wealthy, … How many cars does a rich person have? Investors with less than $100,000 are most apt to describe a rich person as owning three to four cars, while indisputably wealthy high net worth investors – those with $5 million or more to invest – are most likely to say a rich person owns two cars.

How many homes does a rich person own? Forty-three percent of investors with less than $100,000 – vs. 31 percent of the high net worth – indicate the wealthy own three or more homes.

How many vacations do rich people take each year? More than half (56 percent) of the less wealthy investors indicate a rich person takes four or more vacations a year.  Less than 36 percent of high net worth investors indicate a rich person takes so many vacations.

How do rich people make a living? Nearly 49 percent of investors with less than $100,000 perceive a rich person as having “so much money he or she does not need to work.” About 41 percent of high net worth individuals describe the rich as independently wealthy.

The less affluent are more likely than the high net worth to describe a wealthy lifestyle as carefree, 46 percent vs. 35 percent, respectively. The high net worth are slightly more likely that the less affluent to perceive a rich person’s lifestyle as intense, complicated or duty bound. How would you describe a wealthy lifestyle? 

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Rich in America, Part 2: How Much Do the Wealthy Make?

How do people define the “wealthy?”

For that matter, how do people define “rich” (monetarily speaking; not in the It’s a Wonderful Life  sense of having friends, family, health or job satisfaction). The Mirriam-Webster dictionary defines the word as “having abundant possessions and especially material wealth.” What would you call “abundant?” Wall Street Journal reporter Robert Frank, in his book Richistan, wrote that “people’s definition of rich is subjective and is usually twice their current net worth.”

We asked more than 1,200 investors what they considered to be the minimum annual household income it would take for them to consider themselves rich. The highest percentage (38 percent) said at least $450,000. The second-highest percentage (19 percent) said $250,000.

When asked which best describes the minimum wealth level to be considered rich, the highest percentage (27 percent) of our surveyed investors said the proverbial “1 million dollars.” Eighteen percent said $2 million, while 16 percent said $5 million.

What’s YOUR definition of “Rich?”

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Rich in America Part 1: What Does It Mean to Be Wealthy?

What does it mean to be rich?  And how much do you have to be worth to be rich?  It all depends of your view.

What does it mean to be rich in America? Are the wealthy best defined by net worth, income or lifestyle? How do the lives of the rich differ from those of other Americans? Notions of wealth are shaped by age, income, occupation and other demographic characteristics, according to a January survey of 1,260 investors by Spectrem’s Millionaire Corner. Here’s what we found:

  • Age: The vast majority of investors associate wealth with greater security, but older investors are more likely to view security has a hallmark of being rich.
  • Income: Lower-income investors – those who earn less than $100,000 a year – are more likely to associate “more happiness” with the wealthy.
  • Net Worth: The high net worth – those with investable assets of $5 million up to $25 million – are the most likely to associate wealth with greater security
  • Retirement status: Working Americans are more likely to see the wealthy as having more stress and a more complicated life, while retirees associate being rich with greater security and more responsibility.
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